Italy has managed to sell five-year bonds at auction but yields are at their highest level in three years, a sign some investors are still nervous about the sovereign debt crisis spreading from Europe’s vulnerable periphery to its core economies.

Meanwhile, Europe’s banking regulators are about to announce the results of stress tests of the banking system and hope to soothe fears of further failures especially as, in the previous test, Irish banks were deemed acceptable just months before they failed.

Italy’s bond sale helped calm markets ahead of an informal meeting in Rome by officials from the European Central Bank, the European Commission and private lenders to discuss a second Greek rescue plan that leaders hope to announce next week.

Investor worries about the deadlock among European leaders over a solution to the Greek debt crisis have, in recent days, pushed up borrowing costs for the much bigger European economies of Italy and Spain.

The Italian austerity measures are designed to eliminate the country’s budget deficit by 2014 so that it can begin to pay off its vast debts, which amount to 120 per cent of its gross domestic product.

Officials said the revised package would trim the deficit by an extra €8 billion ($10.6 billion). But analysts will pore over the small print. They are wary some measures will be unspecified or scheduled for implementation after 2013, when a general election is due.

The Italian Treasury said it had priced €1.25 billion of five-year bonds, the maximum it earmarked for the sale, with a gross yield of 4.93 per cent, up from 3.9 per cent at auction in June. It also sold a combined €3.7 billion of bonds with maturities of up to 15 years.

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With Italy able to place the bonds, albeit at a higher cost, some analysts said the focus was shifting back to whether European policymakers would be able to agree on a Greek bailout.

“The Italians got away with what they intended to do and it did initially help to stabilise the markets," said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “But the situation now is reverting back to European politics and as politicians don’t seem to be in a desperate rush to get something out, the market is starting to really get nervous."

Though Italy’s sovereign debt is hefty and its economy is stuck in neutral, the market’s jitters also stem from the country’s political instability and rising fears of contagion from Greece and other debt-ridden euro-zone countries.

The tensions between Mr Berlusconi and Mr Tremonti, whom the Prime Minister has seen as a rival and repeatedly attacked as a traitor in newspapers owned by the Berlusconi family, are not new. But the intense international attention on Italy’s political circus is.

Apparently responding to the new investor awareness, Italy’s Parliament rushed to pass the austerity bill after attacks by speculators.

The centre-left opposition voted against the bill, saying it unfairly asked Italians to bear the brunt of the government’s mistakes. But it said it would not present any obstructionist amendments.

Europe’s festering debt crisis may well be approaching its own post-Lehman Brothers moment, when fear finally prompted the British and US governments to take radical action and force most of their capital-thin banks to accept government money – whether they liked it or not.

But, to the frustration of many, Europe seems far removed from such a drastic step.

Instead, the euro-zone’s top banking supervisor will announce this weekend, Australian time, the results of its latest examination into the health of its financial institutions, the results of banking stress tests.

It is an exercise that an increasingly desperate European Union hopes will quell investor fears that the region’s banks have become too impaired by holdings that may be seriously overvalued to provide the loans needed to stimulate economic growth.

While European finance ministers pledged this week that they would have a backstop plan for vulnerable banks, in practice that task will be left to national banking regulators, who have varying levels of resources and political will.

The stress test is the third in three years but only the second in which results are being made public.

It is being overseen by the European Banking Authority, based in London, which has scoured the balance sheets and capital levels of 91 banks, focusing on the exposure banks have to the dubious sovereign debt of Greece, Portugal and Ireland.